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Otelco Inc. (NASDAQ:OTEL)

Q2 2013 Earnings Call

August 8, 2013 11:00 AM ET

Executives

Kevin Enda – IR

Mike Weaver – President and CEO

Curtis Garner – CFO

Analysts

Chris Brown – Aristides Capital

Operator

Good day and welcome to the Conference Call. Today’s conference is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Mr. Kevin Enda. Please go ahead sir.

Kevin Enda

Thank you, Nova and welcome to the Otelco conference call to review the company’s results for the Second Quarter ended June 30, 2013. Conducting the call today will be Michael Weaver, President and Chief Executive Officer; and Curtis Garner, Chief Financial Officer.

Before we start, let me offer the cautionary note that the statements made on this conference call that are not statements of historical or current fact constitute forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other unknown factors that could cause the actual results of the company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements.

In addition to statements, which explicitly describes such risks and uncertainties, listeners are urged to consider statements labeled with the terms please, believes, expects, intends, anticipates, plans, or similar terms to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the company’s filings with the SEC.

With that stated, I’ll now turn the call over to Mike Weaver.

Mike Weaver

Thank you, Kevin. Good morning and welcome to our call. Just want to give you some brief highlights for the quarter and then at that point I’ll ask Curtis to discuss financial results, after which we’ll take your questions. The big event for us this quarter was the exit from the balance sheet restructuring. We’re very pleased that we’re successful and that we’re able to complete that in a very timely and orderly fashion.

The process itself was completed in 61 days. We believe that’s a significant accomplishment for our company and our shareholders as we reduce the outstanding balance from our senior debt by $28.7 million, refinanced the balance of $133.3 million with a new maturity date through August 30 of 2016. In addition to the senior debt renewal, we also have a $5 million revolving line of credit and of course there is nothing drawn on that line at this time. The 13% senior subordinated notes were cancelled and were exchanged for shares of our new Class A common stock. The payment on the senior debt and the cancellation of the senior subordinated notes resulted in almost 51% reduction in total debt from $271 million down to $133.3 million.

In addition to the reduction of the total day and the extension and amendment of the senior credit facility, we also paid 100% of our undisputed trade payables. We value our relationships with our vendors and suppliers and are proud of the fact that we were able to pay those invoices in full.

Also want to note that we did not miss a single day of trading, we emerged from bankruptcy on May 24th in our new Class A shares began trading on the NASDAQ global market on the next trading day under our new symbol OTEA. That’s the principal payment on the senior debt and reflecting payment of the reorganization in loan cost associated with the restructuring transaction. We ended the quarter with $11.1 million in cash on hand. As a result of the reduced debt and lower interest rates we believe that we are well positioned going forward.

I apologize, hang on one second. Curtis could you speak to the… Curtis would you discuss financial results please let me come back.

Curtis Garner

Sure. Thanks, Mike and thanks to everybody for joining us on this call today. Let me provide an abbreviated overview of our financial highlights and then we’ll open it up for questions.

Second quarter 2012 and 2013 both had significant events that were outside of what I would call the ordinary course of business. In 2012 with the announcement of the expected non-renewal of the Time Warner Cable contract and the initiation of our reorganization by the Otelco Board, the company reflected a significant impairment in goodwill and long lived assets. In 2013 on the other hand, we completed the reorganization process as Mike mentioned exiting bankruptcy with new senior credit facility through April of 2016 and 50% less debt. These actions create a significant cancellation of debt income for this quarter. So a big deduction to 2012 and a big positive for 2013, all of which were really non-cash items.

From an operational perspective, total revenues decreased 20.4% to $19.7 million from $24.7 million. Primary reason for the decline was the expiration of Time Warner Cable contract at the end of 2012, which accounted for some 55% of the revenue decline. In addition the SEC’s InterCarrier compensation order reduced access revenue per minute for intrastate traffic and the funding for RLEC even with the new Connect America stock. The balance of the decline is the result of traditional loss of RLEC voice access lines related revenue.

Details on our five revenue categories are contained in the press release with local services and network services declining 29.5% and 23.1% respectively versus the quarter a year ago while transport services showed a modest growth.

Operating expenses decreased 27.8% to $14.5 million from $20.2 million. Cost of services and products decreased 16.2% to $8.9 million from $10.9 million. Selling, general & administrative expenses decreased 36% to $2.3 million from $3.6 million. Just as a reminder reorganization expenses for 2013 is shown separately because once we filed for bankruptcy we created a separate identity for debt on the income statement, while in 2012 there was $0.4 million reflected in SG&A.

Depreciation and amortization decreased 44% to $3.3 million from $5.9 million, primarily on the change in value of the Time Warner contract on our balance sheet. There was no impairment of goodwill or long lived assets this year compared to the $152 million, $162.6 million for last year. As Mike mentioned EBITDA was $8.4 million compared to $10.8 million a year ago and $8.8 million first quarter.

That covers the highlights for the quarter. Our quarterly results are detailed in the press release and our 10-Q should be filed shortly, which will have additional results detail and explanations. Mike, before we go back to Nova for questions did you have some more you wanted to add?

Mike Weaver

I do and I apologize I had a technical difficulty, I apologize for the delay. The only thing I would like to add to this, we continue to work on the margins and our business and as you saw in the second quarter results we were able to improve our EBITDA margin by 1.1% over the first quarter, that’s a direct influence, direct result rather our continued effort to bring those cost and resize our business as we go forward.

For the second quarter we also invested $1,800,000 in capital equipment now that might be the totaled for the first two quarters about $1.6 million. In CapEx we still believe and we are committed to or expect rather our total CapEx expenditures for 2013 to be approximately $7 million.

On the access line equivalents we had a decline of slightly over 1% from the first quarter and that was primarily attributable to some reduction in our residential access lines that were partially offset by gain in our business launch.

The thing that I am pleased about on a going forward and a plastic trend for us is that we continue to generate growth, primarily from our CLEC and our backlog of orders. These are orders, sales that we have made obviously on an ongoing basis that have not yet been bill. Just one of the ways that we used to judge our success and to predict what our revenue stream will look like going forward.

Relatively pleased with our second quarter results the trends of our growth on the backlog is certainly positive and I guess finally we are excited that restructuring transaction is complete and we are excited about that we block our position going forward for the future.

So with that little bit of summing now Nova if you please give instructions for questions, we’ll track those questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And we will take our first question from Tucker Golden with Solas.

Unidentified Analyst

Hi, good morning. Curtis and Mike congratulations on a successful restructuring. I did have a question that obviously will be monitoring, we all be monitoring the balance sheet and the leverage ratio pretty closely going forward and that looks like you are off to a good start. I do wanted to what were the starting point at June 30th cash number was a little higher than I expected. Wondering if there are crude or cash restructuring related expenses as of that point that we should expect to see kind of come in through this quarter or if you were dumping for the restructuring and advisory fees at that point and if that’s really a good number to start from? Thanks.

Mike Weaver

Excellent question Tucker. Thank you for and thank you for dialing in. You know at June 30th we had $11 million and with the bankruptcy process there is approximately $2 million in bankruptcy cost and fees that have not been paid. They are absolutely accrued and they are reflected on the P&L, but the cash we have not paid those yet. The reason we haven’t paid them is we just got court approval in the last two days to do so. So you could reduce that number the way you are thinking about it better than rather than let me say it differently about $2 million would come out of the $11 million for those expenses.

Curtis Garner

In addition to that Mike there’s a month of accrued interest based on how we are paying the GP loans that will be paid in third quarter along with the full third quarter’s worth of interest. So that will take it down again some additional dollars.

Unidentified Analyst

Thanks and just I am sure I can figure that out, but if you don’t mind can you help me out and tell me what that additional month would be in terms of amount?

Curtis Garner

I have to go back and look how they are writing in front of me, but just sent a quick I can give you the amount with. You can take 133.3 million, 6.5% interest and divided by 12 and you get approximately that.

Unidentified Analyst

Okay, so maybe 700,000 or so. Well that’s great. Still ahead of where I thought it would be and again congratulations and thanks for the answers.

Mike Weaver

Sure.

Operator

And we will take our next question from Chris Brown with Aristides Capital.

Chris Brown – Aristides Capital

Yeah, good morning gentlemen and congratulations on the emergence from bankruptcy. Is it fair to say that the income from operations of 45.1 million included kind of two one-time items of $0.5 million of one-time settlements and $0.4 million settlement of disputed charges?

Mike Weaver

Curtis, do you want to answer that?

Curtis Garner

Yeah they are both in there as part of the quarter. Yes.

Chris Brown – Aristides Capital

Okay, great. What is your cash tax rate going to be going forward?

Curtis Garner

For this year the tax rate will be about what a normal. We won’t pay much so we have taxes to may have fee and that kind of thing. For next year because of the elimination of our attached attributes other than those associated with remaining invested property plan equipment we’ll be what I would consider relative standard tax payer in the 35% plus big tax rate.

Chris Brown – Aristides Capital

Okay, fantastic. And then you have been away from the particulars and going more strategic. Can you talk at all about some of the plans you might have or some of the things you might be thinking about in the future for ways to increase revenue without spending a lot of CapEx.

Mike Weaver

Happy to Chris. It’s one of the things that we spend a lot of time with is the senior management team and also with our board members. So here is the things that we are looking at. We have some opportunities in our Southern in Alabama for some fiber expansion outside of our territory. We have acquired, obtained rather a contract to provide additional fiber backbones and skilled system that’s outside of our RLEC territory, that’s a primary contract. That also provides us an opportunity today is to expand and serve the businesses and residences again outside of our RLEC territories with this using that fiber is the backbone for that expansion.

Essentially it’s an edge out strategy that’s one of the things we are considering now. We also are running promotions to reduce the price and increase the bandwidth for broadband out in all of our existing RLEC markets. There remains a great demand as you would expect for more bandwidth with a number of, I think watching more movies and just generally utilizing the internet and Wi-Fi at homes.

So that’s another area where we can expect some growth. Managed services, we are not in the managed services business in any of our managed network, by that I mean network monitoring maintenance only equipment, we are not in that in a big way. That’s an area that we are considering as an expansion where our CLEC the number one product in our CLEC is our hosted PBX, which is simply an optic telephone that works absolutely great for businesses in particular. It works great for small users and it works just as well for large buying in multi-location offices. Because of the success with that product it’s creating demand from our customers to say, okay you have off peak coming into manage my network for me, particularly the small scales and smaller top clients where they may not have their own IT department.

So we’re trying to figure out, I think that’s a great business for us to being in, that’s an area that we are considering for of expansion for that. And so, that’s a bit, one other thing I want to mentioned this is not new for us, but there continues to be demand for additional back half for wireless carriers in our territory Missouri operations in particular have shown some success at obtaining those contracts and putting the fiber in place for the wireless guys. We know where all the towers, towers we add in our territory it’s the a function we pay attention to that, we call on those wireless providers and say are you ready, let us replace those ones with fiber. We are ready to do that.

So those are some of the opportunities that we see out there, I think would make your criteria of how do you grow revenue without spending big bucks.

Chris Brown – Aristides Capital

Great. They are all sound like fantastic ideas. Thank you for that. And then my last question, your CapEx this year is obviously going to be way that then depreciation, do you think the amount of CapEx this year is a reasonable run rate to expect going forward or would you expect it to increase very significantly in the next couple of years?

Mike Weaver

On our models that we did that are included in the disclosure segment from bankruptcy and in our internal plans we’ve pretty much put the CapEx around $7 million. The fact of the matter is we’re focused on making the debt reduces. So we’re not doing that, we are not going to do that at the expense of maintaining our plan and having some growth opportunities in it, but the by the same token I wish we could spend 10 million instead of 7 I do, I think that’s the fiscally prudent thing for Otelco with this plan, I don’t.

So it’s a struggle and it’s a balance between let’s get the debt reduced and let’s invest more in our plan. So our tactic has been to try to simply maximize the CapEx and spend what we have as wisely as we can, which again spend a lot of time with our Board about that and identifying the proper places where we get the most we feel pardon expression buying for the buck with our CapEx dollars.

Chris Brown – Aristides Capital

I am sorry that actually provoked one more question, what are the terms on your debt at this point?

Mike Weaver

It has a maturity date of April 30 of 2016, it has a quarterly principal payment of 1.25%, 5% performance year that principal payment is approximately $1.7 million a quarter. In addition there is an excess cash flow payment that’s required, which is the 75% of the excess cash flow that payment is due on a quarterly basis excess cash flow is a define term in the credit agreement if you want the specifics of that’s public information.

For that those of the terms the...

Chris Brown – Aristides Capital

The interest rate...?

Mike Weaver

It’s essentially 6.5%.

Chris Brown – Aristides Capital

Okay, fantastic.

Mike Weaver

It’s a lot more, but there is a flow and it’s essentially the short answer to that it’s essentially 6.5%. Again if you want the details of that that’s all in public filings.

Unidentified Analyst

Okay. Thank you very much. I appreciate it.

Mike Weaver

Sure.

Operator

(Operator Instructions). And this concludes today’s question and answer session. I will now like to turn back to management for any additional or closing remarks.

Mike Weaver

Thank you, Nova. And thank you guys for joining the call and the questions were inside for and much appreciate it and we’ll look forward talking to you next quarter. Thank you.

Operator

This concludes today’s conference. Thank you for your participation.

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